The fixed-income markets were also choppy but ended the week close to where they started it. The bond yield tug-of-war continued to keep yield on the 10-year Treasury note trading in a narrow band. For example, the 10-year Treasury yield at one point fell toward the low end of its recent range as investors felt the economy and inflation might be softer than expected. But yields rose again on Friday following the better-than-expected jobs report, which caused many investors to predict the Fed would raise short-term interest rates at its next meeting later this month. We continue to favor corporate credits over Treasuries, while maintaining a shorter duration profile than the Bloomberg Barclays US Aggregate Bond Index.
Financial markets were volatile for much of last week, due in large part to fears that Italy could potentially exit from the euro currency—a move that would be disastrous for European banks and financial markets.
Ultimately, however, those fears receded and investors cheered more positive developments about the economy—in particular, stronger-than-anticipated jobs report in the U.S. By week’s end, global equities were higher, interest rates were down slightly and expectations for future volatility had fallen sharply to approximately where they finished the previous week.
We updated our volatility forecasts last week, and our expectations for future volatility levels decreased.
Global equity and fixed-income markets ended the week up slightly, despite volatility along the way. Year-to-date, broad-based bonds are down nearly 2% while global stocks are up 1.5%. Stocks’ excess return over bonds during the past 12 months is now more than 13%.
Investors chasing yield had a mixed week. REITs rose sharply (up 1.75%) as interest rates fell, and both preferred stocks and long-duration bonds posted small gains. Meanwhile, high-yield bonds were flat while emerging markets debt fell more than 1% for the week.
Market expectations for future inflation were fairly flat week-over-week, despite falling yields. The core PCE price index (the Fed’s preferred gauge of inflation) for April came in at 1.8% on a year-over-year basis—right in line with economists’ expectations. That puts core PCE just shy of the Fed’s 2% inflation target.